Does Ben Stein, who writes the more-or-less weekly “Everyone’s Business” column at the New York Times, have any pride of authorship? Stein’s articles have a cobbled-together quality, as if he agglomerated whatever was rattling around in his brain and called it a day when he got to his word count (I’ll concede he might have put a little more effort into his opening and closing paragraphs).

Stein’s target this week is Goldman Sachs, but he fails to land a single blow. He tries to go after Goldman Sachs’ chief economist Jan Hatzius for his recent, widely publicized note that said the subprime-induced credit crunch could lead to a $2 trillion reduction in lending.

Press reports said that Hatzius admitted to using some back of the envelope computations, which would make it reasonable to subject his findings to further scrutiny. Yet Stein not only fails to describe Hatzius’ reasoning, he doesn’t even deign to set forth Hatzius’ $2 trillion conclusion. It’s hard to mount a credible attack on someone’s work if you don’t bother to tell readers what his report said beyond “[subprime related problems] would affect aggregate lending extremely adversely and slow down growth.”

Mr. Sloan brilliantly makes clear, is that as Goldman was peddling C.M.O.’s, it was also shorting the junk on a titanic scale through index sales — showing, at least to me, how horrible a product it believed it was selling.

The Fortune article says no such thing. It dissects a particularly dodgy 2006 securitization of second mortgages. The article reports that the deal was “assembled” in spring 2006. It doesn’t say when it was sold, but presumably no later than the end of the summer.

Goldman kept the weakest of 13 tranches, with a face value of $14 million, as its compensation. The article notes Goldman may have kept parts of other tranches (but knowing Goldman, I somehow doubt that). The story also reports on Goldman’s third quarter financial reports:

Goldman’s profits came from hedging the mortgage securities it keeps in inventory in order to make trading markets. It said in a recent SEC filing, “Although we recognized significant losses on our non-prime mortgage loans and securities, those losses were more than offset by gains on short mortgage positions.”

There’s no smoking gun here. This bit refers to third quarter 2007, not 2006 when Goldman was selling the deal in question. Whether Stein likes it or not, it’s acceptable to hedge your trading inventory. Now if Stein could find some proof that the firm was net short mortgage risk in 2006 when it was peddling this paper, that would be damning indeed.

Similarly, Stein mutters darkly about the Goldman mafia now in senior government positions, and how unseemly it is to have Paulson, who presided at the firm while it was selling dubious debt, now at the Treasury working on remediation. Yes, this doesn’t look right, and there could very well be something dastardly afoot, but very little of what the Bush Administration does passes the smell test. Without evidence of improprieties, this sort of talk sound a lot like what the conspiracy theorists put out.

Finally, we have this priceless bit of analysis:

He [Hatzius] is also postulating that lenders would have to retrench so deeply that lending would stall and growth would falter — an event that, again, has not happened on any scale in the postwar world, except when planned by the central bank.

Stein apparently can’t locate Japan on the map. Its post-bubble contraction was even worse than what Hatzius forecasts for America, and was most certainly not planned by the Japanese authorities. In fact, an article by Mark Thornton points out that Japan,and foreign commentators for the most part described the Japan of the late 1980s in terms of the supremacy of advanced technology and evidence of a new paradigm, the kind of ungrounded confidence we saw during the dot-com era. Jim Surowiecki points out that:

The problem was that the Japanese state and the Japanese financial establishment had enormous amounts of political and cultural capital invested in an ever-rising Nikkei, and as a result, literally refused to allow it to find what one might crudely call a more natural level…

The proximate cause of the bubble bursting was, at least in part, the introduction of futures trading on the Nikkei on the Singapore Stock Exchange (Simex), of all places. Warren Buffett has said that stock futures and options should be outlawed, and it’s not really clear what they contribute to long-term investing. In the case of Japan, what they contributed was a chance to gamble against the boom, which, in a sense, was a chance to make Japanese investors step back and look at how out of control they had gotten. Since the boom had been built on credit, with paper gains in one area (stock) leveraging gains in another (real estate) and vice versa, once the bust began a bad-debt spiral began that continues, to a some degree, today.

But no, Stein would rather ignore the example of the biggest economic crash since the Depression to make his point. With critics like this, Goldman’s PR department won’t be losing any sleep.

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18 comments

Yves, I agree with you 90+% of the time, but part company with respect to Stein’s article. Why? I’ve been writing substantially the same things for months. I belive Stein missed one thing: Hatzius piece was designed not to facilitate GS’s short sales, but provide cover for Helicopter Ben’s printing more money, like a recent Larry Summer’s piece at http://www.ft.com. I see GS as a KGB-like organization that has effected a “bloodless coup” of the US financial system and possibly US government. Why not? Vladimir Putin, “formerly” of the KGB is Russia’s top dog? By the way, Barron’s suggested, “possibly” tongue in cheek, we cancel 2008’s elections and just let GS run everything. To be fair to Hatzius, I haven’t read his article. If I get a chance to look at it, I will.

“There’s no smoking gun here. This bit refers to third quarter 2007, not 2006 when Goldman was selling the deal in question. Whether Stein likes it or not, it’s acceptable to hedge your trading inventory. Now if Stein could find some proof that the firm was net short mortgage risk in 2006 when it was peddling this paper, that would be damning indeed,”

Dont’t forget about Bear Stearns trying to unload “Everquest financial” to retail & institutional investors once they realized how badly these mortgage risks were performing. From my interpretation of several sources, Bear was caught red-handed nad ditched the plan. But not sufficiently embarrassed.

The point I’d like to make is: I don’t see the journalists picking up at that act of attempted investor deception. I don’t think it will be fatal to Goldman either given the laziness and advertising-driven writing of the MSM.

It wouldn’t really be that damning to Goldman.

Does anyone in Goldman (err. Government) see a potential problem when these firms are investing in the very markets they are supposed to be making? Has anyone picked up on how these firms are trying ot “market” small and institutional investors (less sophisticated) into taking on their own money-loosing investments?

I know I lack your level of sophistication in finance/accounting (I’m an engineer) but could someone explain why these firms should be trusted to give any sort of investment advice?

Is anybody else wondering whether the whole point of the MLEC plan was to delay major dumping of assets by SIVs until after November 30, when Goldman has to do an audit quality mark to market of it’s whole portfolio?

Yves, I enjoy your comments, but I disagree with your conclusions pertaining to the crash in Japan. My recollection of what caused the stock market bubble in Japan during the 1980’s was mostly due to the cross-ownership of stock by most large companies and the lack of transparency of this situation in their companies’ financial statements. In addition, there was also the bubble in the Japanese real estate market that fed into the stock market bubble (and probably vice-versa). Further, I seem to recall that by the time the Japanese market hit 39,000 in 1989 most people, including government officials, where well aware there was a huge problem with the market’s inflated value. Recalling those events I agree with Ben’s assertion that the piercing of the Japanese market bubble was at least partly orchestrated by the Japanese government (albeit behind the scenes since no government official could possibly connect overtly with such a position). My sense of what happened was that it was initiated, as Ben Stein implied, by their government’s central bank.

I am always amazed whenever I read his articles and I force myself to pull up his resume only to be miffed that someone apparently this accomplished could write such ameteurish commentary. Goldman is bleeding money in the Alpha fund and trading on its franchise value in the M&A arena.

Accidental:See a post by Jim Willie at http://www.kitco.com on 1 November about GS’s actions in the oil market. Anonymous:That GS is “bleeding money in the Alpha fund” proves nothing. We do not know how much more “blood it would have lost” absent its apparent manipulations. If you want to read amaterurish nonsense go to voxeu.org.

Nothing substantive to add to your post, however, I will say that upon reading Stein’s column, something about it struck me the wrong way. The way he writes is odd; I have no opinion on the merits of his argument relative to yours.

But something about him just does not sit well with me. (I realize this is a shaky and questionable basis on which to critique someone’s work.)

I’m afraid you missed my point re the Stein piece. I am not defending Goldman, but Stein completely failed to make his case on any axis. For example, re the Hatzius article, all he did was fulmiinate that he didn’t agree with the conclusion and the Fed could flood the market with enough liquidity to prevent Bad Things From Happening.

As Krugman pointed out with respect to the Depression, the Fed, contrary to the way most historians portray it, did in fact attempt to increase liquidity. They increased the monetary base, which is what they control. But money supply fell anyhow because people took cash out of banks.

Similarly, I don’t find it hard to believe that Goldman was short while it was selling dodgy product. Indeed, the fact that Goldman and others were selling paper that was clearly hugely risky in large sizes is deserving of criticism. But Stein didn’t prove the first argument, and only mentioned as an aside, rather than a core argument.

Anon of 11:02 AM

Agreed that the Hatzius paper is likely sloppy, or as one might say, speculative. I don’t have a copy, I can only go on what Bloomberg said about it (reading between the lines; they didn’t assess it). But Stein said he had a copy. He should have taken it apart if he disagreed. But no, all he could be bothered to do was say he didn’t like the conclusions and the Fed could rescue the economy.

been there,

I had a senior position in the Japanese hierarchy (unheard of for a Westerner) one of the biggest banks in Japan at the time of the crash, and therefore was an insider.

The MOF would have first asked the banks to stop lending 100% against commercial real estate (and 50- year mortgages against residential real estate) had anyone wanted the bubble to stop. That was the most direct and surgical action to contain/reverse the bubble. It also would have been hugely effective.

Japanese banking was strictly regulated (the MOF for example only permitted a limited set of retail products) so this would not have been an extreme regulatory move. That didn’t happen.

There is some comment in the Western media about the imposition of transaction taxes on real estate leading to the contraction. That isn’t accurate. Income taxes on real estate were so high that it never traded. No kidding. You had basically fictitious valuations on non-trading assets. The one time when I was involved with Japan that I can recall a piece of central Tokyo real estate trading hands was after a massive fire. The imposition of transaction taxes was an ineffective populist gesture. In fact, the name of the game was to APPEAR to be doing something about the bubble, since it was disruptive to Japan’s heretofore egalitarian society, and hope that the participants would start behaving responsibly. Remember, the securities firms bribed the members of the Diet (they ramped stocks via “stock of the week” and other schemes and tipped off the politicians first, or sometimes even gave gifts of stock). The BOJ is the least independent central bank in the advanced world. If Bernanke can’t stand up to the markets, multiply that by 3 or maybe even 10 for Japan.

The BOJ started tightening in 1990, AFTER the market peaked in 1989. The unwind was already underway when the BOJ goofed (or maybe they wanted to signal it was OK by them for stock prices to fall) and the leverage was so pervasive that any unwind was going to be ugly.

Actually, I don’t disagree. The guy has a serious platformm yet he misuses it. How many of us get to write in the New York Times weekly? But his articles come off as being throwaway, as if he can’t be troubled to do the work to make a tight, factually supported argument.

I read Stein’s piece. I did not find Hatzius’ piece, but read numerous newspaper accounts of it. Surprisingly, I estimate the losses from subprime, etc. will be $200 $400 billion, like Hatzius. I also think Hatzius estimate of $2trillion in “lost lending” is reasonable. So? My point is and I think Stein’s point is, why now? Why not months ago? Why does Hatzius release the piece at all? What’s the political motivation? What is Hatzius trying to help Goldman sell?

The article notes that Hatzius has been bearish on housing since 2006, and (the article isn’t crystal clear) he isn’t alone among Goldman analysts having that view.

Nouriel Roubini has been putting out pieces discussing the hard landing sceanrio and how it is now inevitable. He drove it mainly off demand and consumer spending. Hatzius could just have easily been stirred to write by 1) questions from clients asking how bad he thought things would get; 2) an uptick in the level of worry among serious bears; 3) the widespread discussion of whether further Fed cuts are warranted by the economic fundamentals. The ONLY reason for a Fed cut now is to hold off further damage to the financial system. Hatzius’ quick and dirty estimate is one way to size up the problem.

In other words, it’s just as easy to come up with scenarios that Hatzius had his own reasons for writing a piece on macro damage and the firm decided to promote it heavily because it served their interest.

Goldman did have one high profile shill, Abby Joseph Cohen, but Stein hasn’t made the case convincingly that Hatzius is a shill. Stein says that Goldman pressured Hatzius, perhaps subtly, to put out a bearish piece. I don’t think Cohen was pressured into being a shill. She realized being a shill made her very valuable to the firm and gave her great profile on the Street. But she was also a constitutional bull. Remember, these people talk to clients a lot. They are not going to be convincing if they have written something they don’t believe themselves.

And if you want to think along conspiratorial lines, I find it more plausible that Goldman took or adjusted its positions in advance of its economists’ releases, both for their information content and the market impact they might have, rather than the economists are pressured into writing tout pieces.

Again, I am NOT saying that Goldman is pure as the driven snow. I am saying that Stein makes charges he didn’t support.

No Purchased Loan permits the release or substitution of collateral if such release or substitution (i) would create a “significant modification” of such Purchased Loan within the meaning of Treas. Reg. ss. 1.1001 3 or (ii) would cause such Purchased Loan not to be a “qualified mortgage” within the meaning of Section 860G(a)(3) of the Code (without regard to clause (A)(i) or (A)(ii) thereof).

Re: (vi) UCC Financing Statements for filing in each of the UCC FilingJurisdictions described on Exhibit XIII hereto, each naming Seller as “Debtor”and Buyer as “Secured Party” and describing as “Collateral” all of the items setforth in the definition of Collateral and Purchased Items in this Agreement,together with any other documents necessary or requested by Buyer to perfect thesecurity interests granted by Seller in favor of Buyer under this Agreement orany other Transaction Document;

(vii) any documents relating to any Hedging Transactions;

(viii) an opinion or opinions of outside counsel to Seller, substantially inthe form of Exhibit XIV;

The comment re Alpha losing money is to say that Goldman gets it wrong too. A discussion of Goldman is long overdue, but it is more complex than fire in the movie theater. No doubt that the “walls” inside Goldman leak like SIVs. When people start to talk about how much “smarter” GS is, it is a top. GS is a hedge fund that owns a broker dealer. All the comps are broker dealers buying hedge funds. They will continue to outoperform until this changes. GS should be given credit for moving much faster than the peers, but the peers will catch up or cease to be. i’ll leave it to you to comment on what you think needs to be done about hedge funds etc… the discussion is long and complex…

I drafted CDOs and other structured finance deals most of this decade, until Sept 2006. When the Bear funds started leaking in public this past July, I called a few friends, bankers and/or lawyers at Wall Street firms.

They were laughing up their sleeves. They were short mortgage bonds out the gazoo in their proprietary accounts. And one bank (not goldman) in particular had been buying protection in various ways against mortgage bond failures for years while continuing to sell out the front door.

If a bank has a client that wants to package assets, and a customer that wants to buy a package, the deal gets done. Whether it makes sense or is good for society isn’t something a banker is programmed to think about.

Thus, while your critique of Stein’s reading of the Sloan piece is accurate in detail, broadly speaking, his point seems to me well taken.

I have spent zillions of hours on the phone with bankers as they put their deals together. There is no sense of propriety or social care, and even often an angry insistence that the law must be circumnavigatable if the lawyer were only “smart” enough.

I don’t disagree with what you are saying. I worked in the industry in the 1980s and clearly didn’t have the right attitude (one of my clients even said, “You are putting yourself at a competitive disadvantage. You care too much that the deals make sense.”). And in those days, the industry had a sense of propriety which kept the worst behavior in check.

But if you are going to take aim at Goldman, Jan Hatzius is probably the worst place to start. He is a macro analyst. They are about as removed from specific deals as you get. Moreover, Hatzius was negative on the housing market in 2006, when Goldman was still selling CDO garbage. If the guy had the influence that Stein claims, and firm was out to use him to promote their interests, they would have gagged him then.

So Stein, by making half-baked charges, actually damages the cause of unearthing what is wrong on the Street, and particularly at Goldman.

Regardless of the merits of Ben Stein’s specific charge, there is a related, broader charge against Treasury Secretary Paulson that is indisputable: his conflict of interest in dealing with Goldman Sachs. The Secretary not only is directly involved in conspiring in secret meetings with Goldman Sachs to bail it out, but the Secretary has not referred Goldman Sachs (and other Wall Street brokerages) to the Justice Department for investigation and potential prosecution. It is in the Treasury Secretary’s role as regulator and investigator of potential wrongdoing and criminal acts at Goldman Sachs that Paulson has an indisputable conflict of interest. Can Treasury Secretary Paulson be expected to investigate and refer for prosecution Goldman Sachs CEO Paulson? Mr. Paulson has a blatant conflict of interest. He is part of the problem, not part of the solution. Public confidence in the banking system will only be restored after vigorous investigation and punishment of the guilty by federal prosecutors of the biggest financial scandal in U.S. history.